Cuatrecasas, the €35bn bailout and the E1 fee
23 July 2012 | By Ruth Green
26 February 2014
13 March 2014
11 December 2013
25 March 2013
31 October 2013
Cuatrecasas’ decision to take on Spain’s financing business for just €1 has been branded ridiculous by its competitors, but times are tough and there may be some canny thinking behind the measly deal
Imagine the scene. You’ve just pitched for the year’s largest financing deal and already slashed your fees. The next day your phone rings. It’s one of the banks financing the transaction asking you to lower your fees again. After talking to your partners you call them back and say you’ll do it. Then they throw another curve ball: “Listen, another firm has just pitched for €1. Are you willing to go lower?”
VIP or KP?
You don’t quite know what to say. How do you decide when working for peanuts is worth it?
This was the incredible situation that faced several firms in Spain recently when they were pitching to work on the Fondo de Financiación de Pago a Proveedores, (FFPP or, in English, the Fund for Financing Payments to Suppliers) which was created by the Spanish government and will be funded by some 26 financial institutions, led by Bankia, BBVA, Caixabank, Santander and the Spanish Institute for Official Credit.
It is understood that just four firms were invited to pitch for the transaction. They were the crème de la crème of the Spanish legal market: Clifford Chance, Cuatrecasas Gonçalves Pereira, Garrigues and Uría Menéndez. Given Spain’s dismal economic climate, which recently suffered another blow as Moody’s slashed its credit ratings on no fewer than 28 Spanish banks, there’s no doubting the significance of the deal, which will see a €35bn (£28bn) injection into the Spanish economy and help debt-ridden local authorities and autonomous regions across the country. It is not surprising then that the country’s top firms were all keen to grab a piece of the action.
“One bank called us to invite us to pitch and we knew the operation was of the utmost importance and were interested in taking part,” stresses Javier Ybañez, one of the partners from Garrigues who led the firm’s pitch.
The bidding process certainly took the firms by surprise though, as banking and finance partner Fernando Navarro, who was one of the Cuatrecasas’ partners involved in the pitch, reveals.
“The banks initially asked if we were prepared to reduce our fees lower still and we said yes,” says Navarro. “Only then were we told it was €1. I don’t know the details about how the banks came to this decision and whether it was by a majority vote or what, but they agreed to a reduced fee. We thought it was strange, but then we found the banks were not receiving a commission for the work either, so it made a bit more sense that the work was going for just €1.”
Although around 26 banks are taking part in the fund, it is believed that only a small number of these were directly involved in deciding which firm would win the pitch.
Partners at Garrigues were as surprised as anyone when the banks told them that what they had considered an already extremely competitive offer, had been beaten – and by some considerable way.
As Ybañez explains, after pitching for the work they received a phone call just two days later, saying: “Listen – another law firm has offered to do it for €1 and we are offering the other law firms to do the same if they’re interested.”
After several long conversations internally, Garrigues decided to call it a day. It was not the only firm that steered clear of offering its services for a measly €1. Clifford Chance, whose banking and finance head Alberto Manzanares led the pitch, declined to reduce its fees further. Uría Menéndez was the firm that initially pitched the rock-bottom €1 fee and, with Cuatrecasas the only other firm prepared to go that low, suddenly it was a two-horse race for the prize.
So what did the other firms make of the €1 pitch by Uría?
“It was only afterwards that we heard that Cuatrecasas was awarded the work and Uría was the first to offer the €1,” says Ybañez. “We don’t know why Uría decided to bid for €1, nor why the banks chose Cuatrecasas.”
For many lawyers not involved in the pitch process the concept of a €1 offer seems ludicrous.
“It’s all a bit ridiculous, as a pitch for €1 isn’t really a pitch at all,” comments one Madrid-based managing partner.
For Cuatrecasas though, after agreeing to go lower, the price tag itself became irrelevant when faced with the opportunity to work on such a significant deal.
“The exposure of working on the operation is attractive, but it’s also a new type of structure and an interesting financing project,” affirms Navarro.
It’s likely that Cuatrecasas had more than one reason for offering its services for the rock-bottom fee, according to Javier Moreno, director of Iuris Talent.
The long view
“I think the intention [behind the initial offer] was two-fold,” says Moreno, “On one hand it’s a marketing ploy and on the other hand it’s to gain experience in these issues.”
As another source suggests, in a market where competition to offer increasingly reduced fees gets fiercer by the day, the deal was a way of getting the firm noticed.
“When firms resort to heavy dumping for little return, it’s a way to preserve the relationship with the client,” says the source. “The game is to be in the face of clients so they only see you, so when heavy litigation work comes along – which won’t be done at discounted fees – the trade-off of giving away a freebie is that you get more work in the long run.”
“It’s a quid pro quo – they’re telling the banks ‘I’m prepared to work for this amount, so remember me’,” adds a managing partner at a Spanish firm.
For José Ignacio Jiménez, chairman at recruiter Norman Broadbent, the headline-grabbing €1 fee was not only a marketing ploy, but also a sign of the operation’s significance.
“Undoubtedly, Cuatrecasas’ decision to agree to do it for €1 is related to marketing, but it’s also practically pro bono,” says Jiménez. “The €1 fee is just due to a technicality of the tender, but essentially they’re doing it for such a low fee because they see the operation as serving public interest.”
The concept of ‘serving public interest’ (‘para el sentido de Estado’), which has been mentioned time and time again by prime minister Mariano Rajoy since he was elected in December last year, is by no means new to Spanish shores. When the Prestige oil tanker sunk off the Galician coast in 2002 Uría opted to act as counsel to the Spanish government on a pro bono basis. At the time the firm’s maritime head Luis Figaredo cited “public interest” as the driving force behind the firm’s work on the operation.
On this occasion Uría declined to comment on the reasons for pitching just one €1. It is certainly plausible that, due to a technicality in the tender process, a fee of some description had to be offered. In any case, given the firm’s record of pro-bono appointments, it seems likely that that once again this so-called public interest was at the forefront of their minds.
Most lawyers agree that it is not a straightforward pro-bono issue, however.
“Many businesses, including public companies, in Spain are in difficult situations and lawyers continue to receive fees for their advice, so this operation seems no different,” notes Ybañez.
Time and motion
Why then was Uría, with its history of delivering similar work for the government, not chosen?
When pressed, one source admits that when it came down to it, a deciding factor in the banks choosing Cuatrecasas over Uría may have been time.
“I couldn’t say for sure, but Cuatrecasas probably won because of the availability of its team,” comments one lawyer. “My impression is they’re billing fewer hours at the moment so it was probably thought they could dedicate more time to the deal than Uría. And getting the deal done in a tight timeframe was clearly an important factor.”
The tender process closed in April and since then the Cuatracasas team of Navarro, Rafael Minguez and three senior associates has been designing a financing structure for the fund. After one and a half months of intense work that saw Navarro personally dedicate roughly half his time to the operation, most of the documentation was closed by mid-May. Two disposals are set for the end of this month and the whole operation is set to be wrapped up by the end of August.
The complaint, which was originally filed in December 2011 by the Barcelona Prosecutor’s Office, accuses him and his ex-wife of tax fraud by conspiring to evade €3.7m in taxes by allegedly channelling them through companies with no discernible activities. This includes being accused of avoiding certain taxes by allegedly leasing several properties in the name of his holding company – engineering, manufacturing and infrastructure business Emesa – when they were actually for him and his family (see box). Although the firm declined to comment on the matter, saying these issues are related solely to the executive chairman’s tax affairs and not those of the firm, it is clear that as an important figure at the firm – and a name partner no less – whatever happens in this case will reflect on and affect the firm.
Since the beginning of the year the Spanish media has fallen silent about the case and the market is none the wiser about whether the lawsuit will lead anywhere. Given the Spanish procedural system, however, it is certain that it will be a matter of years, not months, before any verdict is reached (see box).
However, when it was announced that Cuatrecasas had won the tender for the FFPP deal and that it was for a mere €1, it set tongues wagging once again.
“The whole thing is highly controversial,” says one lawyer. “It’s been presented as a patriotic issue and a way to serve the public interest.”
If true, this would make it one of the biggest scandals in Spanish legal history.
In the meantime Spaniards are understandably more concerned about the potential ramifications that this unbelievable offer will have on the market and on future bids.
“At the moment there’s a significant price battle – firms that are more full-service are tending to be more aggressive in maintaining their workload, undercutting competitors and starting to compete for matters and deals to which they previously paid no attention,” adds Moreno.
However, he thinks that Cuatrecasas’ decision to work for just €1 has broader and potentially more damaging ramifications for the legal market.
“For me it was surprising, I think it’s dangerous and could be harmful in the long-run for the sector,” he says.
“The situation in Spain at the moment is difficult and there’s less work to go round, so one way of getting work is reducing your fees, but this will be counterproductive for the firms that do it in the longer term,” adds Javier Vasserot, managing partner of Olswang’s Madrid office.
There is no doubt that the pressure to squeeze fees in Spain is at an all-time high. As one managing partner at a Spanish firm told the The Lawyer, it is not unusual to see fees cut by as much as 50 per cent and occasionally more. However, even taking into account the growing pressure, offering just €1 for a piece of work had been unthinkable until this pitch process.
“It is difficult to be specific about the [usual] discount, as it depends on each case,” notes Ybañez. “A 25 per cent discount is already a substantial reduction, but there are cases where the discount has been larger. However, this approach had never been adopted until now.”
“We hope the fee agreed for this operation will not have an impact on the fees for our work,” adds Rafael González-Gallarza, another Garrigues partner who worked on the pitch. “Their clients may ask, why can’t I pay €1 then? What will a client think of you doing work for free?”
However, Navarro is convinced that the offer will not change things for Cuatrecasas’ clients.
“Our clients understand this is a unique moment in Spain and that this strategic operation is critical,” he says. “This is understood outside the firm among our clients and also internally among partners.”
Like many other Spanish firms, as well as being under intense pressure to slash fees Cuatrecasas also needs to reduce its headcount or, at least, curb expansion.
“There’s been zero growth in Spain in the past few years and it’s evident from law firms’ figures that growth is down from last year,’ says Jiménez. “Big firms are suffering most as a result of struggling to maintain their structure and size.”
Partly in response to this several firms, such as Cuatrecasas and Garrigues, have opted to move their partnership towards a full-equity model. Following an announcement at Cuatrecasas’ partnership meeting in March the firm has moved to an all-equity model, but decided to leave around 28 partners out in the cold. It has subsequently emerged that these partners have been asked to leave if they do not improve their performance.
Many of the partners under threat are believed to have worked at the firm for more than 20 years, according to a source close to the firm.
“There’s not a lot of clarity and people are clearly unhappy,” says the source. “The firm has tried to make it globally. This costs money and they’ve got more people on their books than they can pay. It would be bad management to not take a decision about how to deal with the surplus. However, the new equity partners aren’t happy either, as it’s thought they are being paid less than when they were salaried partners. As well as being an international firm, it’s still a regional firm relying on local clients. These clients are suffering in the economic climate and the firm is following suit.”
Although the outward signs, including the launch of a new office in Malaga last year and the long overdue relocation of the headquarters to flashy new premises in Madrid’s Chamberí district earlier this year, are good, internally Cuatrecasas shows signs of facing financial difficulties. For those partners facing the chop who have been under immense pressure to bill more hours, perhaps the €1 deal will be one last bitter pill to swallow.
Despite repeated calls to the firm, Cuatrecasas declined to comment.
Spanish legal market at a glance
“The legal services profession in Spain is in crisis,” says Javier Moreno, a director of Iuris Talent. “Many firms have frozen or reduced their staff and have had to reorient certain practice areas, such as M&A and finance. In general, growth – if there is any – is moderate and there are firms that have shrunk considerably.”
As José Ignacio Jiménez, chairman at Norman Broadbent, explains, the size and remit of firms is also affecting their capability to cope with the crisis.
“What’s occurring is that small firms, like boutiques that do little international work, are suffering as there’s much less business to go round,” he says. “The medium-sized firms with around 80 lawyers are doing best, as they don’t have the same kinds of overheads that larger firms have.”
There are exceptions of course, notes Moreno.
“Firms have grown as a result of a merger or integration – a trend that is on the rise – or because they’ve taken a gamble on hiring partners to reinforce or develop new areas in which they now have a lot of work – procedural, bankruptcy, criminal, economic and so on,” says Moreno. “The most active firms are mid-sized Spanish ones, some international mid-sized ones and also the legal divisions of some of the Big Four.”
Nonetheless, there is a clear air of disillusionment among firms, according to Jiménez.
“The Spanish market is stagnant and retaining talent is a lot harder,” says Jiménez. “The movement is mainly pre-partner – senior associates trying to become partners and being denied.”
Lateral hires are also happening. The market recently saw Osborne Clarke’s Spanish alliance member kick-start its office in Madrid by poaching a five-partner team from local independent Lener. Cuatrecasas recently lost labour and employment partner Antonio Bartolomé and four members of his team to KPMG Abogados. And two of Garrigues’ former managing partners, José María Alonso Puig and Miguel Gordillo Moro, recently found a new lease of life at Baker & McKenzie and Olleros Abogados, respectively.
Change is on the horizon, adds Jiménez.
“Teams are more prepared to change, boutiques are more prepared to integrate and we’ve seen a few Madrid-Barcelona integrations recently, such as Ventura Garcés & López-Ibor y Thomas de Carranza Abogados,” says Jiménez.
As for the equity issues, although Cuatrecasas’ decision has been met with controversy, as Moreno explains, there are several benefits to converting to an all-equity partnership.
“The figure of the salaried partner is not recognised under labour law in Spain,” says Moreno. “Some firms, including Cuatrecasas, have opted to turn all salaried partners into equity partners to avoid labour contingencies and to homogenise their partnership. In such processes, logically there are people who are unhappy, above all when a lack of growth is making it more difficult to gain promotion, but for me it seems a natural process and one that should be implemented in all law firms to avoid the situation whereby a firm has partners at different levels, although then the unit-based system that each firm has set in place rewards those who contribute most, whether commercially, managerially or in terms of seniority.”
In December 2011 the Barcelona prosecutor’s office filed a complaint accusing Emilio Cuatrecasas and his now ex-wife Mercedes Barceló of tax fraud of an estimated €3.7m (£2.9bn). It is alleged that one way they did this was by channelling personal expenses through companies as a way of avoiding tax. Many of these companies, such as engineering, manufacturing and infrastructure business Emesa, helped him amass a personal fortune to make him one of Europe’s richest lawyers.
It is not unusual for a lawyer in Spain to invoice his services to the partnership of the firm (much like barristers’ remuneration system in the UK). It allows partners to claim for any additional expenses incurred and also makes it easier for law firms as it removes the issues of having to provide social security and other employment benefits. However, in this case Cuatrecasas is alleged to have done this with his own personal expenses and those of his families, which has included lavish purchases of cars and a 90ft yacht, ironically called the Concordia.
At the moment the case is still in the investigation phase (la fase de instrucción) where both suspects (los imputados) and witnesses (los testigos) will be called forward. The process is overseen by the investigating magistrate (el juez de instrucción) Cuatrecasas and Barceló were originally called to give evidence on 24 February but the judge adjourned the deposition as the defence had not received a CD with information about Barceló that was considered important to the case. Although the prosecution has since argued that other information has been sent, a new date for the deposition has yet to be announced.
Once the deposition goes ahead and all the necessary evidence is gathered, the investigating magistrate will decide whether there is a criminal case to answer and if so, will refer the case to another judge (el juez de lo penal). The suspects would then become defendants (los acusados). Regardless of what happens, any verdict will be a few years off yet.
Cuatrecasas is being represented internally by his own firm’s lawyers, which includes one of the country’s top white-collar crime specialists Luis Jordana de Pozas.
If he is found guilty he will not be automatically disbarred, as would be the custom in the UK. It will be up to the Spanish Bar Association (el Consejo General de la Abogacía Española) to determine whether it’s a question of professional conduct.
Aside from coverage in the Spanish press at the beginning of the year, there has been little other public reference to the case.
Certainly, it will be a difficult thing for Cuatrecasas himself to shrug off until he is proven innocent. Until last month, he had been a long-standing member of the executive board of Meliá Hotels, one of Spain’s leading hotel chains. In a recent report published by Meliá, it noted that he had not stood for re-election after 16 years on the Board. However, rather than related to the case, this move is perhaps more likely to be related to his appointment as president of the board of business lobbyist group Barcelona Global. Evidently the allegations have not deterred the group from viewing Cuatrecasas as an appropriate ambassador for Barcelona’s business community.